Knight-Swift Transportation has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.2%. The stock now trades at $53.63, marking a 21% gain. This performance may have investors wondering how to approach the situation.
Is now the time to buy Knight-Swift Transportation, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Do We Think Knight-Swift Transportation Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons we avoid KNX and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Knight-Swift Transportation’s recent performance shows its demand has slowed as its annualized revenue growth of 3.7% over the last two years was below its five-year trend. We also note many other Ground Transportation businesses have faced declining sales because of cyclical headwinds. While Knight-Swift Transportation grew slower than we’d like, it did do better than its peers. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Knight-Swift Transportation’s margin dropped by 10.8 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Knight-Swift Transportation’s free cash flow margin for the trailing 12 months was 3.4%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Knight-Swift Transportation’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Knight-Swift Transportation doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 30.3× forward P/E (or $53.63 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward a top digital advertising platform riding the creator economy.
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